1. Crisis: traditional investments at risk
Global markets face heightened uncertainty. Geopolitical tensions, including trade disputes, are creating significant market anxiety, while concerns over global economic growth, particularly in major economies, are fuelling fears of a slowdown.
Traditional equity markets, particularly in the US, could be at risk of correction following years of strong performance. Investors are increasingly seeking safe-haven assets, and gold has historically been a useful portfolio addition during periods of economic and geopolitical instability.
Figure 1: Gold vs. economic uncertainty and monetary policy
Source: Bloomberg, Baker, Bloom and Davis, 31 January 2025. Time period selected for contextual and illustrative reasons. Global economic uncertainty indices are calculated by Baker, Bloom and Davis based on news sources that contain terms related to uncertainty.
2. Central banks: record buying continues
Global central banks continue to accumulate gold at unprecedented levels, signalling a vote of confidence in the metal’s enduring value. This sustained demand supports gold prices, reinforcing the asset’s strategic importance in today’s financial landscape. As some central banks diversify away from the US dollar, gold is a primary beneficiary.
Figure 2: Annual central bank buying (selling)
Source: World Gold Council, 31 December 2024.
3. The comeback: gold equities look set to outperform
Despite gold’s strong performance, gold equities have lagged, largely due to the overhang of high costs and pandemic-related disruptions. However, these headwinds are easing, creating a valuation gap vs. both physical gold and the broad equity market. Due to both the improving cost environment and a rising gold price, gold mining margins are increasing. Specifically, lower diesel costs due to lower oil prices and refining margins, along with decreased labour and maintenance costs, are contributing to margin expansion. Merger and acquisition activity is also starting to increase in the gold mining sector, potentially adding value to the sector. As a result, we think gold miners are potentially poised for a re-rating and a ‘catch-up’ rally.
Figure 3: Margins for gold companies have jumped up in 2024
After two years of margin pressure, record gold prices have led to margins expanding rapidly
Source: BMO Capital Markets, Factset, Company reports. NB: Average costs based on top 20-30 gold producers under BMO coverage. The number of companies included each year could vary depending on individual company stage or M&A.
Conclusion: a timely opportunity
We think gold equities offer a combination of upside potential and defensive qualities in today’s market. The convergence of geopolitical uncertainty, strong central-bank demand, attractive valuations, and favourable macroeconomic conditions makes gold equities an interesting investment proposition in the current environment.
General risks. The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made. Environmental, social or governance-related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks. Geographic/Sector: Investments may be primarily concentrated in specific countries, geographical regions and/or industry sectors. This may mean that the resulting value may decrease whilst portfolios more broadly invested might grow. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Commodity-related investment: Commodity prices can be extremely volatile and significant losses may be made. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios.
